On August 11, 2011, the Delaware Supreme Court en banc, in IAC/Interactivecorp. v. O’Brien, No. 629, 2010, affirmed a decision of the Court of Chancery on an issue that goes to the very core of one of the Court of Chancery’s equitable defenses — laches. While the issue that the Supreme Court addressed seemed simple enough “whether the Court of Chancery correctly applied the doctrine of laches in finding that a corporate indemnification claim was timely filed” the discussion penned by Justice Berger was complex and enlightening.
By way of brief background, in a dispute that started in 2002 regarding a merger between PRC and Avaltus, Mr. O’Brien, a corporate officer, sought advancement of legal fees and expenses in 2003 and then indemnification in 2005. Mr. O’Brien successfully litigated the indemnification claim against his former employer, PRC, in Florida but PRC went bankrupt before the litigation concluded. Mr. O’Brien then filed an action in Delaware seeking the same indemnification against PRC’s parent company, IAC. While the Court of Chancery “acknowledged that the claim likely would be barred by the statute of limitations,” it nevertheless ruled in Mr. O’Brien’s favor “because it held that the claim was not controlled by the statute of limitations or barred by laches.”
On appeal, IAC argued that the Court of Chancery erred when it found Mr. O’Brien’s indemnification claim to be timely by applying laches instead of the three year statute of limitations that controls contract claims at law. Although “the limitations of actions applicable in a court of law are not controlling in equity”, the “Court of Chancery ordinarily will follow the applicable statute of limitations…” As a result, “the timeliness of indemnification claims normally is decided by reference to the three year statute of limitations.” See 10 Del. C. § 8106.
The Court of Chancery, however, determined that “this is one of those few cases where the analogous statute of limitations should not be applied” because of “unusual conditions or extraordinary circumstances.” The Court was quick to add that there is no precise definition of what constitutes “unusual conditions or extraordinary circumstances” but there are several factors that the Court in its discretion could consider which include:
1) whether the plaintiff had been pursuing his claim, through litigation or otherwise, before the statute of limitations expired; 2) whether the delay in filing suit was attributable to a material and unforeseeable change in the parties’ personal or financial circumstances; 3) whether the delay in filing suit was attributable to a legal determination in another jurisdiction; 4) the extent to which the defendant was aware of, or participated in, any prior proceedings; and 5) whether, at the time this litigation was filed, there was a bona fide dispute as to the validity of the claim.
In affirming the Court of Chancery’s decision, the Supreme Court focused on the efforts Mr. O’Brien made to advance his claim in Florida and the corresponding delays in Florida in prosecuting his action. The Court noted that: (i) Mr. O’Brien promptly sought advancement and/or indemnification in Florida; (ii) after the Florida trial court ruled against him, Mr. O’Brien could not, in good faith, proceed against IAC for more than one year, while the decision was on appeal; (iii) in January 2008 PRC unexpectedly declared bankruptcy shortly after the Florida appellate court determined that Mr. O’Brien’s claims were valid and enforceable; (iv) the Florida courts held that Mr. O’Brien’s indemnification claim was meritorious; and (v) in July 2008, shortly after the PRC bankruptcy plan was approved, Mr. O’Brien filed an action in Delaware seeking indemnification and advancement of attorneys’ fees and expenses for both the Florida and Delaware actions. The Supreme Court found this “combination of factors is highly unusual, and constitutes unusual circumstances that allow the Court of Chancery to ignore the analogous statute of limitations in deciding whether O’Brien’s claim was barred by laches. Turning to the classic laches analysis, we agree with the trial court, for the reasons it expressed, that O’Brien’s delay was not unreasonable and that LAC was not prejudiced.”
IAC also challenged the amount of attorneys fees awarded, and in particular the following contingency (premium or success) fees: “(1) a 20% success fee to the firm that worked on the arbitration; (2) a $100 per hour increase to the same firm’s hourly rates for all work after the arbitration; (3) a 50% premium above standard hourly rates to a second firm; and (4) a contingent $100 per hour premium above standard hourly rates to a third firm.” As the Court noted:
[c]orporate officers are entitled to indemnification only for those attorneys’ fees that are “actually and reasonably incurred.” In determining whether fees meet that standard, Delaware courts have considered,  were the expenses actually paid or incurred;  were the services that were rendered thought prudent and appropriate in the good faith professional judgment of competent counsel; and  were charges for those services made at rates, or on a basis, charged to others for the same or comparable services under comparable circumstances.
IAC had objected to the fee awards on the basis that “the premium fees were not ‘incurred’ because they do not represent work done, but rather the success achieved.” The Supreme Court, like the Court of Chancery, rejected that argument noting that “[a] premium or contingent fee is payable for work done, if that work is successful. The fact that the amount of the fee is not set until the result is obtained does not change the fact that the fee is incurred based on hours or work performed for the client.
Postscript: Thanks to Delaware litigator Kurt Heyman for forwarding this opinion.